tv Nightly Business Report PBS July 26, 2011 7:00pm-7:30pm PDT
>> tom: just one day after the president called for washington to work together, republicans and democrats remain deadlocked over the debt limit. >> it's reasonable, it's responsible, it can pass in the house and it can pass in the senate. >> legislation is the art of compromise, and it's too bad the people on the other side of this capitol don't know those words. >> susie: what's at stake if the u.s. defaults? we'll ask one ratings agency executive that's already downgraded the u.s. credit rating. it's "nightly business report" for tuesday, july 26. this is "nightly business report" with susie gharib and tom hudson. "nightly business report" is made possible by:
this program is made possible by contributions to your pbs station from viewers like you. captioning sponsored by wpbt >> susie: good evening everyone. the bitter stalemate over raising america's borrowing limit and reducing its deficit continues playing out in washington. tom, it looks less likely that lawmakers will have an agreement before next week's deadline. >> tom: susie, even though there's still a little hope for a last-minute deal, it doesn't seem possible at this point before early august. a new reuters poll finds a small majority of economists thinks the u.s. will lose its triple-a rating from a least one major rating agency.
we'll hear directly from the rating agencies tomorrow, when executives from standard & poor's and moody's investment services testify on capitol hill. they'll be questioned about the role their industry plays in the debt ceiling debate. >> susie: in tonight's program, we'll detail why every american has a stake in these negotiations and get advice from a wealth manager about what investors should do. but first, we turn to a man who runs a leading independent ratings agency: egan jones. ten days ago, the firm was the first u.s. rating agency to downgrade the country's credit rating from triple-a to double a-plus. joining us now, sean egan, founder and managing director of egan jones. sthawn, -- sean thanks for comig on the program. >> thank you. >> >> susie: tell us why your firm decided to down grade the u.s. credit rating. >> put iting on anything watch as of march 1st. we've been looking at it closely for the past year.
basically we down graded because the debt to gdp for the u.s. has reached the point where we had to take enaction. in comparison, canada has a 35% roughly debt to gdp and the u.s. has about a 98% debt to gdp. got to the point where we felt as though we owed it to our institutional investor clients and we only serve institutional investors. that they needed to know how we felt about issuing the report. >> susie: do you think that the s&p ratings agency or moodies will follow your lisa in this respect? >> i'm not quite sure. they're seeing the same things we are. if there is substantial progress with the talks, they might take action. but actually, there are two separate issues. one is the raising of the debt ceiling so that bills can be paid. another one is making adjustments so that it's easier to pay bills in the future.
>> susie: well, so what do you think that the metrics are here? if there is some progress made on raising the debt ceiling or the size of the spending cuts, will that making the ratings agency satisfied just to stand pat the way things are? or will they take some action? >> i think to a certain extent the mystique has been broken, that the triple a is being questioned and if it weren't for the problems in europe right now, you'd probably see an increase in funding costs. what we'd like to see and i think a lot of other investors would like to see is a path to more debt to gdp. one thin that needs to be addressed is the dramatic increase in debt over the past five years, probably about six trillion dollars and how that might not happen in the future, what sort of checks and balances might be put in place so that doesn't happen. additionally, the retirement of the babyboomers and that's going to put some pressure on the u.s.
government budget. >> susie: these are certainly all important issues that have been discussed in washington but right now there are two proposals on the table. there's the republican version and there's the version from the democrats. as you size those loads up, do you feel comfortable with one or the other? >> we don't like to take stands. as i say to all our analysts, check your politics at the door, check your religion at the door, just try to get to the truth quickly. the ultimate question is whether or not the country is being properly managed. there's good stewardship. if you look at a comparison of the u.s. versus other triple a rated credits, you'd have to say there have been a few slips. hopefully there are some adjustments and the u.s. will get back on the right course ahead. a huge number of resources including the fact that it's reserved currencies so the u.s. is given a lot more leeway than the typical country. hopefully we take advantage of that. >>
>> susie: so let's say there's a last minute middle of the road deal sometime over the next couple days where the debt ceiling is raised and it is something like $3 trillion of spending cuts. would you be satisfied with that, or would you consider dropping and down grading the u.s. credit rating once again? >> you know, we've already crossed the rubicon and that's by putting a negative watch as of march 1st and the most important step is down grading. we're unlikely to take a positive action unless and until we see significant progress with the debt to gdp. as far ons our taking additional action, i don't know. we probably won't because we've already sent a signal to our clients about the conditions. so i think we'll probably take away and see the approach and hopefully things will get back on track. >> susie: that will be great. thank you so much for coming along and talking to us this
evening. >> thank you. >> susie: we've been speaking with sean egan of egan jones the credit rating agency. >> tom: the lack of a deal to raise the country's borrowing limit sent stocks lower. the dow fell 91.5 points, the nasdaq slipped nearly three and the s&p 500 off 5.5 points. volume rose from yesterday's pace, with 835 million shares moving on the big board and 1.75 billion on the nasdaq. still ahead, our "word on the street" is "gold." alix steele of thestreet.com explains what record-high gold prices tells us about the debt ceiling debate and the future of the yellow metal. >> susie: if the nation's credit rating is lowered, there would surely be a ripple effect. interest rates on everything from mortgages to student loans to car payments would rise. and as erika miller explains, even americans who don't borrow or invest will still feel the sting. >> reporter: open your wallet and look inside.
if you own any of the 700 million credit cards used in america, you have a stake in washington's debt negotiations. unless lawmakers reach an agreement that satisfies ratings agencies, the u.s. cod lose it's triple-a badge of honor. that would raise borrowing costs for uncle sam. it would also mean higher rates for people who have home loans, car loans, and student loans, as economist bob brusca explains. >> if you have anything that has an interest charge attached to it, chances are it's a variable interest charge. it will be going up. >> reporter: consumers and businesses could also have a harder time getting credit, the lifeblood of the economy. if the u.s. government can't be completely trusted to pay its debt on time, bankrate's greg mcbride says lenders will become more worried about you. >> if uncle sam can default, lenders are going to be reluctant to lend to anybody out of the fear of risk of default, and then you could get a freeze in the entire credit system. and that's really what puts the
economy and all of us at peril. >> reporter: but what if you are one of the few americans that does not rely on credit in your everyday life? well, you're still affected. many states and local governments would experience their own ratings downgrades, pushing up their interest rates. as a result, some states would be forced to cut services, others would opt to hike taxes. add it all up, and economists say debt negotiations could have serious economic consequences. >> you could wind up losing the job that you have. you could wind up destroying consumer confidence and pulling consumer spending back even more. and there's a very real chance this could precipitate a recession. >> reporter: unfortunately, even if the us keeps its triple-a rating, there will likely be fallout. brusca says just having the debate get this close to the deadline undermines investor confidence in the u.s. government. erika miller, "nightly business report," new york. >> tom: the lack of a debt deal hasn't jarred stock or bond investors. after all, stock prices haven't crashed and interest rates haven't shot higher despite predictions of an economic calamity if the u.s. government
goes into default. we spoke with lane jones, the chief investment officer at wealth management firm evensky and katz. his advice to investors? >> well it's harder than it is to hear. the advice is that you have to earn -- stay in the market until you earn market returns. staying the course and be prepared to accept the volatility, whatever all that might be based on how you're invested in order to think long term and make it. >> tom: have you noticed the tolerance has changed from the banking crises or even the.com back in 2000. >> this is unique in that you're talking about the foundation of modern capital market pricing in the treasury. and alternativity it has a finite sort of deadline. unlike other crises where you maybe generally feel like there's something bad those going to happen you just don't know when. this has a date attached to it and because of that you can potentially look to the option markets in order to buy some protection around the finite
period. so it is a little unique. >> tom: what are you going to be doing on friday of this week or monday of next week? >> i would expect i'll be talking to clients and making sure that everybody's hanging on. ment watching the news like everybody else to see if something comes to fruition before markets open on mod or sunday afternoon. >> tom: what's the advice to others who are relying on bonds and counting on those payments on bonds. >> as counterintuitive as it may be, treasures may be the flight to quality place where people go if there is, you know, a default or something that happens to the markets. >> tom: so you think that government bonds could actually benefit if there's no deal. >> i think it's very possible in the very near term. but in the very very early stages, you might see a flight to quality into the very short u.s. government paper. even if it has negative yields just to make sure your money's there. >> tom: lane one thing that's
noticeable is the phones aren't ringing. how to you explain that in the market. >> people have been patient. i think you're seeing that in investment markets as well that people are, whether right or wrong, expecting that something will get done, so perhaps they're putting their faith in u.s. congress. i guess we'll find out. >> tom: lane, i appreciate it, thank you so much. >> susie: the securities and exchange commission is requiring large traders to register with the government and make available more information about their trades. today the agency approved a new rule that will level the playing field for investors and make markets more transparent. the move is in response to last year's flash crash, when the dow plunged more than 600 points in five minutes. the rule will likely impact the brokerages of the largest banks such as goldman sachs and bank of america, as well as big hedge funds and investment companies. >> tom: home prices in the united states rose slightly for the second consecutive month in may, but the real estate market still has a long way to go before a recovery. the s&p case-shiller index was
up 1% compared with april. prices rose in 16 of the index's 20 cities. they fell in detroit, las vegas and tampa. phoenix home prices didn't change. credit for the increase is higher housing demand in the spring. a separate report showed fewer people bought new homes last month. according to the commerce department, sales fell 1% as homebuilders remained reluctant to increase construction.
>> susie: it's the initial public offering investors are craving. dunkin' donuts parent dunkin brands comes to market tomorrow. it priced tonight at $19 per share. the franchisor hopes to raise as much as $400 million. dunkin was bought by a trio of private equity firms back in 2006 for $2.4 billion. while donuts may be in the name, it's the coffee customers really come for. tom, 60% of dunkin' sales are coffee. >> tom: susie, some less-than- stellar bellwether earnings reports hurt stocks as the deadlock in washington over the debt ceiling continues. let's get to tonight's "market focus." the dow industrials saw the worst of the selling among the three major indices.
this is the past 90 sessions, including today's 91-point drop. the index has failed three times in the past three months to get over 12,800. we were able to push up this high back in the spring time. the leading loser today was conglomerate 3m. shares took a dive, falling more than 5% on heavy volume. the selling takes 3m below $90 per share for the first time since march. and here's why. its quarterly earnings came in as expected, no upside surprise. the firm says japan's earthquake and tsunami in march cut into sales and profit margins. among the products 3m makes is a specialty film used for flat- screen tvs. the company says that business will remain soft for the rest of the year. leading to today's sell-off. after the close, amazon.com turned in a much-better-than- anticipated quarter. earnings beat estimates by six cents per share. the online retailer says sales of its kindle electronic book reader accelerated in the second quarter compared to earlier in
the year. some growth there. shares were able to fight back against the weak tone in the market to end the regular session with just a small gain. after the earnings report, the stock shot up about 6% from this closing price of $214 per share. if that buying holds through to tomorrow, it would push amazon to a new high. companies involved in getting all those amazon.com orders shipped around the world didn't do so well today, though. u.p.s. fell more than 3% even though earnings were better than predicted last quarter. instead, its c.e.o. warned the gridlock in washington is weighing on the company. trucker j.b. hunt fell 3%, and maker of kenworth and peterbilt trucks, paccar, shed more than 10% thanks to disappointing earnings. ford saw its profits come in a nickel better than estimates in the second quarter, but it saw higher costs for steel and weaker sales overseas. ford shares fell almost 2% as
volume topped more than 100 million shares-- very heavy. with the drop, it is less than 20 cents away from testing its june low. as ford was dealing with higher steel costs, steel makers were dealing with higher raw materials costs. a.k. steel lost more than 17% of its share value. that takes the stock to its lowest level since last fall. higher raw material costs and weaker steel prices led to a big earnings disappointment. it was the same story at u.s. steel. it fell more than 8%. finally, last night's big disappointment was net-flix, with a disappointing outlook. shares fell more than 5%. technical analyst michael kahn puts this on his chart on our website, n.b.r. on pbs.org.
and that's tonight's "market focus." >> tom: another day without a debt deal and another record high for the yellow metal. that brings us to tonight's "word on the street," "gold." alix steele is a reporter at thestreet.com. it's always nice to see you. $1600 and counting, a record high for at least two sessions in row. how do you describe this recent rally in gold? is there much volume behind it? >> well no, it's the summer season so there's light volume. this is real a save haven play.
it's a great barometer suggesting how scared investors really are over the possibility of the u.s. default come august 2nd. >> tom: with that in mind, how scared are they? are they concerned or terrified. >> concerned not terrified. the reason i say that we are seeing record highs like you said. if we were facing the worse crises the u.s. ever seen we could see gold at 27 1700, 18002000 within days or weeks. that's what i'm hearing. we're not seeing that yet, we're not seeing that kind 06 strong conviction in a rally. >> tom: we haven't seen it with both hands maybe just one. traditional safe haven you mentioned in times of uncertainty. is this any different or pretty standard rally we're seeing? >> this is a pretty standard rally we're seeing is a. there are two strong camps what happens in we do or do not deal in terms of gold actually. i think that will be really actualing? -- telling in terms of how the rest of the mark will react. >> tom: if there is a deal before the deadline on august
2nd, what say your gold bugs out there about what happens to the price of gold? >> 50/50. here's the argument for gold going higher no matter what, right. so there's a default and everyone runs to the safe haven haven even if there's a debt resolution there's so much fiscal issue out there in the world and the u.s. that gold will still be a safe haven. regardless the u.s. dollar has kind of really lost its safe haven appeal which makes gold even shinier as a safe haven. as the speaker bain he were's deal gets massed that leaves a lot of uncertainty in the market. he wants to raise the debt ceiling and that's going to leave a lot of cloudiness out there for investors as to what's going to happen down the road. >> tom: alix there is that thought if there's no deal it's pretty much sell everything, stocks and bonds and precious metals like gold, right. >> absolutely. if there is a deal we could see as much as 20%, 40% including
gold. just how long that will last in gold like 2008 it might pop back better than the other assets is totally up for grabs. now the other part is 23 we do get -- if we do get a done deal gold is going to sell off. if we see massive spending cuts who is going to waist their money buying gold. you have to think of that way as well. i talked to a lot of traders saying gold is a little over heated right now. we'll see it no matter what. >> tom: it's the he can change that trades goals futures. how about disclosures. do you own any gold yourself. >> no just the gold jewelry, tom. >> tom: you can read her article at the ling on our website. it is world on the street with alix steele. >> susie: here's what we're watching for tomorrow: the federal reserve releases its beige book survey of regional economies. june's durable goods orders are due out, and we'll see the weekly reports on crude oil and gasoline inventories. also tomorrow, hilary kramer is our "street critique" guest. you can email your questions to email@example.com.
billionaire investor george soros will no longer manage money for outside investors. he plans to return about $1 billion from his "quantum fund" to clients, according to a letter his firm sent to shareholders. that's just a small portion of the $25 billion soros oversees. the move is due to changes in regulations related to last year's financial overhaul. soros is famous for making bold bets, especially his 1992 bet against the british pound that earned $1 billion for his clients. >> tom: in what would be the largest municipal bankruptcy ever, alabama's biggest county is teetering on the edge of insolvency and faces creditors later this week. jefferson county is home to more than 650,000 people, as well as alabama's largest city, birmingham. it's buckling under the weight of more than $3 billion owed as part of a massive sewer construction project. the county commission has scheduled a meeting for thursday and will seriously consider bankruptcy if an agreement with creditors isn't reached.
>> susie: do you work with millennials? that's the generation of adults born between 1980 and 2000. for the most part, they're used to working in teams and tend to make friends with people at work. tonight's commentator enjoys managing this new generation of employees. he's harry lin, executive-in- residence at idea-lab, a technology incubator in pasadena, california.
>> being of my age, and being in my industry-- the internet-- means that i have the pleasure of routinely working with young people. software developers, web designers, social-media marketers-- employees i endearingly refer to as "kids." these kids are a main reason i chose this industry more than a dozen years ago, and one of the reasons i continue to work in it, despite the fact that i don't look as good as i think i do when i wear skinny jeans to the office. see, though it's conventional wisdom to criticize millennials as narcissistic, spoiled with a.d.d., i find that the 20- somethings in the high-tech sector truly want to make a difference. if you came of age after september 11, your adult life is one of foundational disruption. the tech field is nothing if not disruptional. these kids decided to embrace constant change rather than resist it. to share rather than hoard. to google fact-check it rather than simply believe what's told to them. they work really hard, too, as long as you give them free soda
and snacks. the millennials i work with give me hope about our future. i only hope that one of them hires me out of pity when im completely irrelevant. i'm harry lin. >> tom: just a reminder, you can catch us online at n.b.r. on pbs.org. you can follow us on twitter, @bizrpt, or my personal feed, @hudsonnbr. if tweeting isn't your thing, friend us on facebook at bizrpt. >> susie: for those of you who are already our facebook friends, we asked if you're worried about a possible u.s. default. here's a couple of the responses. kersi wrote "what i am worried about is the impact of this charade upon my i.r.a.s as a consequence of a possible market meltdown. these blokes in congress are a bunch of rich people with cushy jobs and excellent benefits playing chicken at my expense. now i am sweating bullets. i can't wait for the next election. mark said, "default is not the worst thing. i worry about what i'm going to have for dinner tonight. is it takeout or fire up the grill? if i ran my household like the way the government does, i would
be in jail." if you have comments please join our discussion. that's "nightly business report" for tuesday, july 26. i'm susie gharib. good night everyone, and good night to you too, tom. >> tom: good night susie. i'm tom hudson. good night everyone. we hope to see all of you again tomorrow night. "nightly business report" is made possible by: this program was made possible by contributions to your pbs station from viewers like you. captioning sponsored by wpbt captioned by media access group at wgbh